As of late, the debate between the relative veracity of “Keynesian” versus “Classical” economics has come to the forefront of public debate. To be sure, we live in an incredibly insecure time, with regards to economic and financial strategy, and as such, these theoretical debates have come to the forefront of public economic discourse. In the interest of attempting to help to solve these intellectual dilemmas, this paper will briefly dissect the major theoretical differences between Keynesian and Classical economic theory, and will also examine how public economic policy since the Great Depression has adhered to one theoretical side or the other. To be perfectly succinct, Keynesian economics tends to focus on issues of aggregate supply and demand, whereas Classical Economics focuses on long run aggregate supply. For the purposes of this paper, it will be assumed that Classical Economic theory presents the best solution to both our long-term and short-term struggles, and will present a solution therein to these issues.
In the interest of explaining both sides of the current economic problems that currently beleaguer the United States, this paper will first begin with a breakdown of Keynesian economic theory. To be succinct, Keynesian economic theory is predicated on an underlying theoretical framework of aggregate supply and demand. In order to make this theoretical concept more concrete, I will illustrate Keynesian economic theory thusly: aggregate supply and demand is infinitely “elastic,” meaning that even though material supplies seem to be running low, every participant within the economy will expect his or her “fair share” of the collective “pie.” Within the Keynesian economic theoretical framework exists an implicit expectation that the common worker, if he or she feels that they are being “cheated” out of their fair share, will then revolt by working incompetently or working at a relatively slow pace, thus negatively impacting the economic production of their larger organization as a whole (Levant 42).
With regards to the Classical Economics theory side of the equation, it can be summarized as thus: long run aggregate supply is inelastic, meaning that, in the short-run, workers will infinitely continue to work at low wages as long as they need to, because their livelihoods depend upon their paychecks, and they will be willing to do whatever it takes, so long as the paychecks keep coming in, because they are terrified of starving to death, even though they are quite aware that their employers are exploiting them for everything they have (Dubia 198). In the Classical Economical view of the overall economy, all people are essentially driven by their own need for survival, as well as the survival of their own offspring, and they will willingly succumb to any manner of economic exploitation, so long as it serves the needs of their own survival. However, this view of economics, from the point of view of an organizational manager or otherwise, is necessarily shortsighted. Human beings are much more than “survival machines,” and to view them as otherwise is to miss the “long view” of things from an economic standpoint. While our current economy seems well-poised to meet the immediate survival needs of most human beings, it simply does not provide much by way of long-term, emotional, spiritual, and psychological needs (Klein 218). Are organizations really willing to confront the fact that they are, in essence, treating their employees as brute animals who only need to be fed and housed in order to be kept happy, and who will willingly work for very little in compensation for having their basic survival needs met? This is a question with which organizational managers and leaders will have to grapple for the next few decades, and I sincerely hope that they arrive at the correct answer.
In regards to major economic policies that have been enacted in the wake of the Great Recession, which is the worst economic crisis to beset our nation since the Great Depression, these have been largely Keynesian in nature. The first of these major economic policies to be enacted is the Economic Stimulus Act of 2008, which was signed by President George W. Bush on February 13, 2008. The Economic Stimulus Act of 2008 was a $152 billion USD bill that provided for stimulus payments, in the form of income tax rebate checks, to American taxpayers. President Bush hoped that the recipients of these tax rebate checks would immediately take the cash and spend it on consumer items, thus directly “re-injecting” the cash into the overall economy and fostering economic stimulation. However, as the economists Matthew D. Shapiro and Joel Slemrod have observed, Bush’s vision of shopping sprees by the recipients did not come to fruition. As Shapiro and Slemrod observe regarding the Economic Stimulus Act of 2008, “Of those earning less than $20,000, 58 percent planned to use the rebate to mostly pay off debt. In contrast, 40 percent of those with income greater than $75,000 planned to mostly pay off debt. This behavior suggests that lower-income consumers face a liquidity constraint that will also be binding in the future” (376).
With regards to this potential “liquidity constraint” of lower-income individuals, and how this can affect our future economy, this raises a major concern. As is well known, many of the Americans who are currently considered to be “low-income” also face staggering amounts of student loan debt. If such individuals are financially hobbled by Federal student loan payments, how will they ever gather sufficient disposable income in order to fully participate in the economy? Indeed, the upcoming “student loan debt crisis” may provide the grounds for an upcoming governmental intervention, as younger Americans will not be able to participate in the economic activities that are known to directly stimulate the economy, such as getting married, financing a house, and bearing children.
The issues of the possibly impending “student loan debt crisis” notwithstanding, it is also important to discuss, within the context of Keynesian economic policies that have been enacted in the wake of the Great Recession, the American Recovery and Reinvestment Act of 2009. This act was signed into law on February 17, 2009, by President Barack Obama. With regards to the intricacies of the American Recovery and Reinvestment Act, they are are best summarized by Jeffrey C. Steinhoff and Paul L. Posner, who state that it is “a stimulus bill of spending increases and cuts totaling $787 billion to get the economy moving again–$288 billion in tax benefits: $275 billion in contracts, grants, and loans; and $224 billion in contracts grants, and loans; and $224 billion in increased entitlement spending” (15). As regards to the overall impact of the American Recovery and Reinvestment Act of 2009 on the overall economy, it is difficult to state. While it seems that unemployment rates have steadily declined since the Act, much of this can simply be the result of unemployed Americans who simply “gave up” on job-seeking since the economic downturn, or who simply decided to become freelancers or independent businesspeople. However, regardless of the employment outcomes of the American Recovery and Reinvestment Act of 2009, it is undeniable that they have resulted in a newly optimistic perspective within the United States about the outlook of the overall economy. While certain pockets of American society, namely those in the South who have been negatively affected by the outsourcing of labor to foreign countries are pessimistic about the economy, most Americans’ attitudes have been positively impacted by these changes.
As far as fiscal policies since the so-called “Great Recession” of the late 2000’s go, however. some seem to fall squarely on the side of the “Classical Economics” side of the equation. One instance of a “classically oriented” fiscal policy in the last decade or so might be that of the Affordable Care Act, or “Obamacare.” To be specific, the Affordable Care Act of 2010 allows for any United States citizen to apply for federally subsidized health care insurance coverage. From a “classical economics” theoretical standpoint, this governmental stance makes absolute sense. After all, many disenchanted workers claim that the only reason they stay at the jobs in which they are currently employed is because they are frightened of losing their employer-sponsored health care coverage. The Affordable Care Act of 2010 has thus alleviated many of these problems. For one thing, the ACA of 2010 has relieved employers of the responsibility of providing health care insurance to most of their employees (Holdsworth 216). Further, it has meant that individual workers no longer necessarily have to remain at a job that they despise in order to maintain their health care coverage.
For present day employers in this decade, the Affordable Care Act of 2010 is no small feat. As mentioned previously, many contemporary American workers state that the only reason they remain in the jobs in which they are currently employed is because they are guaranteed health insurance through their present employers. From a classical economic theory standpoint, this social view can be potentially disastrous. After all, a classically oriented employer wants to believe that his or her employees are at the job for no other reason than altruism, and that they want to do a good job in order to satisfy the demands of their respective employer. However, it is clear that this assertion is, in many regards, completely untrue, and that most contemporary American workers go to their jobs on a day-to-day basis in order to satisfy the immediate needs of their employers, which are to ensure the highest levels of productivity at the lowest minimal cost to themselves. In this framework, is it really any great surprise that American workers would suddenly presume that the onus is on “themselves, to look after themselves?” Really, why should the average American worker really care that their employer posts quarterly profits that are well above average, if these profits are not going to benefit them directly? Do American organizational managers honestly think that they are the only selfish individuals in this entire nation? Do they honestly believe that the people who work under them truly care about their own personal welfare?
The respective “Keynesian” and “Classical Economic” theories provide us with a great deal of insight into the contemporary economic problems that beleaguer us. However, in order to come to a satisfactory answer, we, as a nation, need to arrive at a satisfactory conclusion, which will help as many people as possible in the current day and age, and moreover, will help those who come after us in future generations. As for me, I believe that the way out of our current economic situation lies within the answers that are to be found within Keynesian economics. As a country, we need to recognize that the working classes of our nation will not sacrifice endlessly so that the middle classes can enjoy their “creature comforts.” Indeed, with the social segregation that currently characterizes much of our country, why should we assume this to be automatically the case?
- Dubia, Marina, Vladimir Cvijonic, & Miguel Gonzalez-Loureiro. “Keynesian, post-Keynesian, versus Schumptrian, neo Schumptrian.” Management Decision 49, no.2 (2011): pp. 195-207.
- Holdsworth, A. “Market Power and Techno Structure in John Kenneth Galbraith’s Thought.” Journal of Social and Administrative Sciences 3, no.2 (2016): pp. 214-218.
- Klein, Daniel B. “The Ideological Migration of the Economics Laureates.” Econ Journal Watch 10, vol. 3 (2013): pp. 218.
- Levant, David Goffrey. “Economics and the Limits of Optimization: Steps Toward Extruding Bernard Hodgson’s Moral Science.” Journal of Business Ethics 108., no., 1 (2012): pp. 37-48.
- Shapiro, Matthew D., & Joel Slemrod. “Did the 2008 Tax Rebates Stimulate Spending?” The American Economic Review 99, vol. 2 (2009): pp. 374-379.
- Steinhoff, Jeffrey C. & Paul L. Posner. “The American Recovery and Reinvestment Act: Is Government Turning a New Page in Accountability, Transparency, and Intergovernmental Relations?” The Journal of Government Financial Management 59, vol. 11 (2010): pp. 12-20.